The Mortgage-Relief Con

You're behind on your mortgage payments and the bank is threatening to foreclose. Then one day a letter appears in your mailbox from something called the Residential Relief Foundation. The envelope has a picture of the Great Seal of the United States, so it must be the feds, right? The Great Seal is on the letterhead, too. "Due to the current foreclosure crisis," it begins, "the Federal Government has urged all mortgage banks and lenders to allow qualified borrowers to modify their mortgages. Residential Relief Foundation is currently assisting homeowners seeking relief on their delinquent mortgages through the Loan Rewrite Initiative Program." This program can reduce your monthly payment by "as much as 40%" and "eliminate all delinquent payments and fees." Call this toll free number for a free consultation!

Great Seal … "Federal Government" … "Loan Rewrite Initiative Program." Huh, you think. That must be some federal program to help homeownersfacing foreclosure.

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But, of course, it isn't. It's a private company that's just gotten busted by the Federal Trade Commission, which alleges in a complaint that it engaged in various deceptive practices. The Residential Relief Foundation won't reduce your mortgage debt by the promised amount, according to the FTC, even after it collects an up-front payment of $1,495. Which is a relative bargain compared with the $4,250 that U.S. Homeowners Relief charges some customers up front, according to a separate complaint. U.S. Homeowners Relief, according to the FTC, promises to refund your fee if your loan modification gets turned down, but by the time you call to complain that you never got the modification, the line has mysteriously been disconnected.

On Nov. 19, the FTC issued a rule aimed at cracking down on these practices. The regulation prohibits the collection of any fee until the customer signs onto a bona fide loan modification from his bank. It also requires that these companies disclose up front that they are not affiliated with the government and that it's possible the lender may not approve any given loan modification.

According to the FTC, there are two reasons why private mortgage-assistance-relief servicers have been able to snag customers.

The first reason is that these fake government programs are better-publicized than the real government program (the Home Affordable Modification Program, or HAMP) created to help delinquent homeowners. The second reason is that the HAMP program isn't providing all that much relief. The Treasury department initially projected that HAMP would provide relief to 3 million or 4 million borrowers by February 2012, but the number of borrowers in delinquency or foreclosure is more like 7 million. And the FTC is too polite to point out that HAMP is unlikely to reach even 3 million or 4 million borrowers; thus far, it's reached fewer than 500,000. More than half of all trial modifications have been scrapped. Although banks are required by law to offer HAMP modifications to all eligible customers, they violate this provision with impunity. Sometimes they actually foreclose on homeowners who are already involved in a HAMP modification; one part of the bank neither knows nor cares what the other part is doing. In an October report to Congress, the inspector general for the Troubled Asset Relief Program (i.e., the bailout, which created HAMP) reported that not a single bank has had to pay a fine for violating HAMP guidelines. (The enabling legislation didn't really provide a means to do so.)

In other words, the Obama administration, though it didn't create the mortgage-relief con, has inadvertently abetted it through ineffective administration of a foreclosure-relief program that Congress conceived too modestly. An FTC crackdown on the scammers is a decent starting point to tackle the problem, but better still would be more vigorous enforcement of HAMP and/or additional legislation expanding HAMP's powers. Until a real government agency steps up efforts to help homeowners dodge foreclosure, fake government agencies will continue to find a ready market.